Friday, August 29, 2014

Immune to Ukraine

The first week of September should be bullish, as the fund managers return from Labor Day weekend and pile on risk ahead of the ECB and nonfarm payrolls report next week.  Ukraine situation is smoldering in the background, but it is something for the Europeans to worry about, the US will not be affected much.

Yesterday, we had a Ukraine scare and it dissipated within hours and those who sold in the hole regretted it a few hours later.  If you look at the charts, you can see the underlying strength of this market, oozing with buyers lurking on every dip, and bear catalysts hardly present.  Yellen ain't going to spoil this party unless every one is smashed out drunk and puking all over the dance floor.  Right now, the bulls have a good buzz going, and have yet to get out of control.  If we do get out of control, you will see it with the momo tech names, which have been very strong during the August pullback.  Stocks like TSLA, FB, TWTR, and even AAPL etc will start to go bonkers to the upside.  We are not there yet.

Bonds look overstretched here, but they move like a supertanker, they will only reverse direction when there is the all-clear and those waiting to buy bonds can't wait anymore and just hit the offer.  We are close to that point, if not there right now.  But shorting bonds is always tough, and you have to have very good timing to pull off a good short trade.

You either ride this US equity bubble or get out of the way.  I am not good at riding bubbles, so I am getting out of the way.

Wednesday, August 27, 2014

Bunds Getting Extreme

The German Bund 10 year went below 90 bps today and has set an all-time low in yields.  The first 4 years of the German yield curve are in negative territory.  That is unheard of.  Europe is on a speed course towards Japanization of their bond market.  Only 40 more bps to go!  In the face of this kind of move, the Treasuries are naturally bid, but not as well bid as one would expect.  The Bund-Treasury 10 year spread has blown out to 145 bps.  The move higher in Bunds looks like short capitulation.  With Draghi's QE talk, the bears couldn't take it anymore and it's gone parabolic.  But the thing about QE is that it actually ends up being bearish for bonds, not bullish.  Look what happened when QE2 and QE3 started, bond yields grinded higher, not lower.  So I am bearish on Treasuries over the coming weeks.

QE is all but priced in for Europe, and IMO, there is much more room for yields in Germany to go higher than lower, especially if equities keep grinding higher, as I believe will be the case.  Even though we are entering bubble territory, we cleared out the weak hands and had the pullback that refreshes in early August.  The market should be safe for the next several days, and I expect an upward bias.  Longer term, SPX 2100 looks very doable by the end of the year.  I will not play long on this bubble, but will buy dips, because the ECB QE will keep a bid under stocks for the next few months.

Tuesday, August 26, 2014

Low Volume Low Action

You would think SPX 2000 would get the traders excited and volume pumped up.  But yesterday was one of the lowest volume days of the year.  The action was overnight, with the healthy gap up.  By the time the regular market hours started, the trading range tightened up and there was little action.  7 point ranges during regular trading hours, after an 8 point gap up.  More is happening overnight than during regular trading hours.
There is not much opportunity for daytrading.  This is an investor's market, or a longer term trader's market.  September is coming up, and it is usually a bearish month, but with Draghi set to lay out his QE plans, I doubt there will be anything meaningful on the downside until Thursday, September 4, the day of the ECB meeting.  The Draghi backstop is there to protect the market till next Thursday.  I am not shorting this market and do not plan on shorting it till we get to September.

Monday, August 25, 2014

Draghi Promises QE

We are almost at SPX 2000 with anticipation of a QE from Draghi, who was dovish.  I guess it is Whatever it Takes, part 2.  That is putting a bid to Bunds, which are again back towards highs for the year.  Somewhere along the line, it should be a good short, but it is very difficult to make money on the short side.  I was short going into last Friday, expecting consolidation, but it never even got to my modest target of ES 1980.  I covered, fearing another potential gap up after no WW III weekend.  And this time, it is a Draghi gap up.  They all pay the same for longs, and hurt the same for shorts.

I have decided to change game plans and will buy Treasuries instead of going short stocks to play for a down move.  Treasuries remain amazingly well bid despite new all time highs in S&P.

Thursday, August 21, 2014

Finally Some Enthusiasm

Well it took a trip to new all time highs before we could get the enthusiasm that I wanted to see before shorting this monster rally.  I am short at 1990.25 and will be looking to cover after Yellen's speech at Jackson Hole tomorrow 10:00 AM ET.  I am expecting a sell the news reaction, as most are expecting a very dovish speech.  The market is set up for a selloff after the event, rallying for 10 straight days, and now I am seeing calls for SPY 200, and S&P 2000 by tomorrow.  

By the way, this is a BTFD market, and I will quickly cover my short around 1980, and will look to get long around 1975, perhaps we get there by Monday.  I am bearish on bonds, and will look to short Treasuries on any equity selloffs over the next few days.  Eventually we will bust through 2000 on the S&P, but we should consolidate this huge up move for the rest of the month.  

Wednesday, August 20, 2014

Bonds Look Topped Out

After an emotional blowoff top on Friday, where the 10 year Treasury yield got to 2.31%, and Bunds below 1% yield, we are selling off.  I am getting strong feelings that bonds will now be entering a bearish phase, and yields should slowly rise from here till early next year.

I was bullish on bonds earlier in the year, but got less bullish once we hit around 2.5% in May, and have been kind of neutral since.  Now I am getting bearish on bonds because the sentiment has taken a 180 degree turn.  Also, we are nearing the end of the bond buying, which means natural buyers need to support Treasuries here.  It is almost the perfect storm for a bond selloff, which fits with my view that the stock market will continue to grind higher to 2100.

I know I have stated previously that it is better to be long financial assets rather than be short them.  With the Fed doing QE and with lots of money chasing stocks and bonds.  But QE is almost over.  And although shorting bonds is an uphill battle now with the upward sloping yield curve and negative carry, the potential for a interest rate reversal higher is much greater than any negative carry headwinds, IMO.

As for stocks, we have accomplished what bull markets do.  They scare out investors with geopolitics and spooky headlines, which have very little fundamental effect, and march back higher.  All we have done this July and August is get traders beared up while the market is chopping around at the same place that it was in early July.  Yet bearishness is definitely higher.  This market should blast through 2000 milestone with ease.

It is still a BTFD market.  Still.

Monday, August 18, 2014

Don't Doubt the Bore

I am sure on Friday we had shaken the confidence of investors with that mid day swoon, but now on Monday, it is totally forgotten, and Ukraine just lost a bunch of credibility as their reports seem bogus.  Perhaps Ukraine was long Treasuries and was doing a pump and dump on global financial markets!

We have the relief gap up that there is no World War III and we are actually tacking on a few points from the open as I write this.  The lagging of the European indices is notable here, as the Eurostoxx index is still way below Friday's highs, while the S&P has blasted through them.

I am sticking with the the theme of the bore, with a grind higher that will leave investors shaking their heads that the rally is artificial.  You have to trade what the market is, not how you want it to be.  It is back to the summer doldrums, after a temporary August storm.  Over the longer term, still think S&P gets to 2100 before we top out.  Short-term, perhaps some consolidation, and not much opportunity.

Thursday, August 14, 2014

The Bore is Back

Welcome back to the Bore.  Home of the 6 point intraday range, tiny volume, and green markets.  And of course both bonds and stocks up.  It is almost like the apocalypse if you see both bonds and stocks down. It is normal now if you see them both up.  The stock market loves low interest rates, so when bonds are rallying, and stocks are rallying, that is about as bullish as you can get.

The tropical storm has passed, and its blue skies again.  I would not fight this rally, especially coming off the capitulation last Thursday.  The hedge funds will be scampering to add back long exposure now that the storm has passed, and there is FOMO: fear of missing out.

With the Bore back in place, there will be much less trading to do.  Expecting a grind higher for the next few days.  Blog posts will be sparse during the Bore.  When we get some action again, will post more often.

Wednesday, August 13, 2014

Tough Shorting a Bull

Playing for a drop is not easy in this bull market.  I shorted the bounce, and it bounced some more.  Now we have blasted through the ES 1940 barrier from Monday and overnight and since we dropped so fast 2 weeks ago, there is very little resistance till you get to ES 1956, or around SPX 1960.  I took the loss on yesterday's short.  I will save my bullets for later.  I still believe there will be a big swoon sometime in the next 4 weeks, but timing it is tricky.

I am sure last January is on many investors' minds, so fear of missing out is a pervasive psychological factor on this bounce.  And since we're in options expiration week, having bounced strongly, it is unlikely that we will get any meaningful selloff this week.  Looking at the put volume over the last 2 weeks, fund managers are well protected this week with August options.  So if we are going to selloff, it will likely have to be after this week.

Tuesday, August 12, 2014

Shorting the Bounce

The oversold bounce is upon us, and we got as high as 1940 yesterday, which was slightly above the 1936 top of range that I was thinking of, but I wanted to avoid getting run over by a runaway up move so I waited till today to get short at 1933.50.  It is possible that we get another up day today but I wanted to make sure I got in the short before the train left the station.

On Monday, permabear Marc Faber was talking relief rally and thinking we would bounce, unfortunately his call was a day late as most of the move had already been made off of Thursday's low.  When I see permabears go on CNBC and talk about an overdue bounce, then I know that there are a lot of others looking to try to catch a rally.

I've seen comparisons to the late January selloff, and this is far more insidious.  I don't see this ending quickly and making a quick V bottom like the last time.  The rally has gotten more mature, and this time, you are getting much closer to the end of QE than you were in January.  Geopolitics is a convenient excuse for the down move, because you can't talk about the Fed all the time because it would bore the audience.  But this is about the Fed, and the ending of QE, which caused convulsions in the market in the summer of 2010, and the summer of 2011.

I am getting a strong sense that this pullback will last at least another week, longer than I initially expected.  Perhaps we get the bottom next week after options expiration and the put protection isn't quite there, making it easier for the market to panic.

Monday, August 11, 2014

Top of the Range

We are very close to what I believe is the top of the range from 1891 to 1936.  Since we have a strong gap up today,  I don't expect a selloff today, but it should come either Tuesday or Wednesday.  With what I see as very limited upside and lots of downside, the risk/reward favors shorting at these levels.  But I will wait for a couple of hours after the opening bell, because of the possible gap and go scenario.

No rush to short today, probably short either late in the day or tomorrow morning.

Friday, August 8, 2014

Day Late Dollar Short

Got a little too excited looking for capitulation today, shorting at ES 1914 and looking for a move back down to 1905.  Took a loss on the short and now will look at higher levels for a re-short.  If that was the end of the pullback, I would be shocked.  Still looking for a drop back down to 1880, but we'll probably have to consolidate this range here, which is 1891 to 1936 (expecting an up move to 1936 on Monday) for a few days before we make the final push lower.

Dip buyers will not go away easily, and they feel emboldened now that they have the V reversal off of the overnight low at 1891.  Will wait for them to overreach on the upside on Monday and take a swing short, looking for a move back down to 1895 late next week.

P.S. - They don't make it easy.  Thought we would easily close above ES 1924 but the big sell orders at the cash close into the futures 4:15 PM close have taken us right back down to 50/50 territory at 1923.50.  Staying above 1924, and we have room to run to 1936, staying below 1924, and we are right at the top of the new range and we'll just selloff on Monday.  Considering we squeezed higher on Russian troops leaving border of Ukraine, I am leaning towards the second scenario, sell off on Monday back down to 1900.

Short Side Today

I am putting on my bear suit today.  With this gap up from Ukraine "de-escalation", we have made a dramatic reversal off the overnight lows at 1891 and are at levels where intraday shorting provides a good risk/reward opportunity.  We should chop between 1907 and 1915 in the first hour but after that, I am expecting weakness as the European close approaches and then further weakness in the afternoon as fund managers will be reluctant to take overnight risk on equities.  We have entered the de-risk phase of the market, and with so much risking going on over the past several months, this pullback will not disappear so quickly.  Plus with deals breaking up, the fundamentals (not Ukraine) are speaking of equities that are too high given the realities of the economy and the imminent end of QE.

I believe these Ukraine headlines are puppet masters pulling the strings.  Some of these Russian officials must be having a field day trading bonds and stocks off these headlines!  Game plan is to play short today, off of ES 1914-1915 and look for a flush lower in the afternoon.

Thursday, August 7, 2014

Europe Blowing Up

Europe is dragging down the world markets again.  Is this the Euro crisis, part 4?  We had part 1 in May-June 2010, part 2 in June-September 2011, part 3 in May-June 2012.  The DAX is near strong support around 9000-9025, so we are just above those levels.  It should bounce on this first visit.  On the next visit, I think the DAX 9000 support will crack, which will drag down the S&P with it.

Even though market is around flat, VIX August futures is underperforming, down -0.35, or 2.2%.  Usually VIX underperforming is a sign that the downside is mostly exhausted in the short term, as hedgers have already loaded up on VIX to protect against further downside.  That being said, we haven't had much of a bounce, the biggest dead cat bounce occurring Monday afternoon, since then, we haven't been able to crack ES 1925, which is price zone after the big 40 point down day last Thursday.  We are making lower highs and lower lows.

Along with the timing indicators from past pullbacks, I expect another swoon in the coming days. It should be within the next 3 trading sessions, so either Friday, Monday, or Tuesday.  On that down swoon, ES 1880 should be tested, and probably find loads of dip buyers waiting to gobble up shares.

It is too early to buy the dip, and a bit difficult to short considering the lack of obvious sell setups coming from an oversold bounce.  This market is not letting you in on the short side, which is quite the change of character.  Markets that don't bounce even when oversold usually end with a capitulation move lower.  Treacherous to go long this market, but still waiting for a better sell signal.  If we can bounce today back up to 1922, that would be a good area to initiate shorts for a move down to 1880-1885.

Wednesday, August 6, 2014

Market Gets Interesting

We had a boring market for so long, we've finally woken up to some volatility, and there are opportunities again to trade short term moves.  It is now clear that we will have at least a 12-13 day selloff, which means we can go down till next Tuesday.  From there, I expect a bounce into opex Friday, August 15.  After that, it will be hard to tell.  If its an extended 22 day pullback, we could selloff for another week, or we could just continue to go higher off the bottom like last February.  We are destined to hit 1880 sometime next week.  The path is unsure, but trading action speaks of more weakness ahead.

Ukraine has always been there, its a convenient dead horse, you can beat it anytime and somehow it is considered rigorous market analysis.  What we have is a market that went up because of stock buybacks and asset allocations.  Now that you are seeing high yield bonds get hit, the endless money spigot for corporate borrowers is on borrowed time.  Less borrowing, less buybacks.  Also deals are getting pulled.  That's a removal of a positive catalyst.

I did go long overnight and it surprisingly gapped down today.  I will bailout on a morning rally and look to short that rally in the afternoon.

Tuesday, August 5, 2014

Dump Out of the Blue

When I am making trades, I find myself often to be a bit early.  For example, today, when I got out of the ES long at 1923.50, something didn't smell right.  We went up higher after I closed out the long, to hit 1930, but only briefly.

We had a big rally yesterday and we steadily dripped lower in AH, even lagging the perennial laggard, Europe.  Of course, the long side is quite forgiving, so we got a move back up to 1930 off the gap down open just to give a bailout card for those who got long yesterday.

Now suddenly the market drops 10 SPX points in 10 minutes out of the blue.  The bears are in control here.  But it is too early to call for a break of the recent range right now.  It would surprise me if we broke 1910 today.  I still would try to play the range of 1910 to 1940 till Thursday.  After Thursday, all bets are off as we could get that capitulative wave down to 1880.  Capitulation usually comes as a down move matures, it is still too early for the capitulation.

I still want to buy the dip here, as there should be one more rip higher to 1935 or so before we cascade down to 1880.  The crowd is getting bearish, so this down move is not going to last for long.

Monday, August 4, 2014

1910 to 1940

The initial impulse down move off of the top we made on July 24 has defined its range.  ES 1910 is the bottom of that range and 1940 is the top of the range.  Usually after a down Thursday and choppy Friday, you do see a gap up on Monday, and that's exactly what we're getting.  I would have made a play for the gap up on Monday if we had gotten a little closer to 1910 on Friday's close, but the risk/reward wasn't that compelling at 1918.  Usually after the carnage over the past few days, in this market, you will have those that have been waiting in the weeds for a 3-5% correction suddenly willing to put on equity exposure.  That is the bid you will get today and tomorrow.  Beyond that, I don't trust the long side.

Just like late January, we consolidated for several weeks, chopping boringly at the top and then suddenly dropped 40 points in a single day.  If we are to follow that script, and I am not saying we will, since this situation is definitely more bearish (we are 150 points higher, catalyst of lower bond yields has mostly been used up, QE nearing an end).  So at the minimum, we should selloff for as many days as late January early February.  That selloff lasted 10 trading days.  I am expecting a 12 day selloff this time around, +/- 1 day.  Strong support is not at 1900, but at 1880.  If we break 1910, which I expect within a week, we should slice through 1900 with ease.

At 1880, I am willing to take a swing long ES position and hold for a move back up to 1940.  I think that is where the best risk/reward is.  Short side still feels vulnerable to monster short squeeze gap ups out of the blue, because bloggers are bearish, so I am only going to short rallies, not down moves hoping for panic.  

It is now better to short ES than go long Treasuries if one wants to play for a down move.  The Treasury market looks exhausted on the upside.

Friday, August 1, 2014

Europe Falling Apart

We are no longer worried about China, it is Europe.  Europe doesn't have the growth, and they are Japanizing their bond market, so that you have super low bond yields and deflation.  You cannot get a growing stock market in a deflation.  Look at what happened to Japan in the 1990s.  That is the future of Europe.  It was Europe that caused the big gap down in futures ahead of the nonfarm payrolls.

The bond market is now acting nervous.  It was acting quite confident, going up despite stronger equities, boosted by the drop in European sovereign yields.  Now that you have dropped to almost 1% on the Bund yields, you are going to have a tough time going lower.  If bonds wants to get stronger, it will have to do on its own strength, not from inherited Bund strength.  And it seems to lack the buying power, as we have gotten a change in character, with bonds going down with stocks, a rare occurrence this year.

I am expecting this pullback, which started last Friday, to last 12-13 trading sessions.  We are on trading session #6.  So expecting a potential bottom around Tuesday, August 12, +/- 1 day.

I will buy dips during this down trend, and sell rallies.  Buying levels are ES 1900 and below, ES 1885.  Sell levels at around ES 1945.